As the global private credit market is expected to double in size by 2028 to $3.5 trillion from $1.7 trillion, institutional investors are looking to diversify their portfolios by exploring new opportunities in Latin America. With the saturation of the U.S. private credit market, Latin America is increasingly seen as a potential growth area, Victor Dias Vieira Clementino and Sergio Aguiar, lawyers at Kobre & Kim, told Octus, formerly Reorg, in an interview.

“Historically, Latin American markets have been perceived as passive investments, primarily in bond-indexed funds,” said Dias Vieira, who is licensed in New York and is a foreign legal consultant in Brazil at Kobre & Kim. “Private credit, however, offers a way to access emerging markets with higher returns while providing the ability to tailor loan terms and protections to specific jurisdictions.”

This flexibility allows investors to mitigate some of the risks associated with investing in Latin America, such as political instability or economic volatility, Dias Vieira explained.

Although private credit (nonpublicly traded instruments provided by nonbank entities, such as private credit funds, often through direct lending) is not yet widely established in Brazil and Latin America, the potential growth of that market could offer greater contractual flexibility, according to Aguiar, who is licensed in England and Wales and is a foreign legal consultant in Brazil at Kobre & Kim.

“Lenders in private credit arrangements have the ability to include provisions in loan agreements including personal guarantees that enhance their ability to enforce contracts, including mechanisms for extra-judicial enforcement in the event of default,” Aguiar said.

Although three-quarters of the private credit market is concentrated in the United States, according to the International Monetary Fund, Latin America is reportedly being referred to as the next frontier. Private credit funds are expanding in the region through loans to small and medium-size enterprises, or SMEs, distressed companies, and infrastructure projects, according to the association for private capital investment in Latin America, or LAVCA.

The number of private credit deals closed in the region reached a new high in 2023, growing to 164 from 132 in 2022, and were worth nearly $4 billion, as stated in LAVCA’s industry analysis report. Infrastructure and project finance projects are driving the growth, such as the recent Almar Water Solutions $1.56 billion financing package backing a water conveyancing project deal, according to Project Finance International.

Although there aren’t specific projections for the future growth of Latin America's private credit market, overall structured finance issuance in the region is expected to reach $35 billion in 2025, up from approximately $31.6 billion in November 2024, according to S&P Global Ratings. This anticipated growth reflects a broader expansion in financial activities, including private credit.

The alternative lending sector in Latin America is also experiencing growth, according to Research and Markets. The market was projected to expand by 27.7% annually, reaching $28.2 billion in 2024. Over the medium to long term, the adoption of alternative lending is expected to continue its upward trajectory, with a compound annual growth rate of 19.6% from 2024 to 2028. By 2028, the alternative lending market in the region is forecast to increase to $57.8 billion from $22.1 billion in 2023, according to Research and Markets.

A country-by-country ranking of bank credit to the private sector from the World Bank offers insight into which economies are more active. In 2023, Chile had the highest bank credit to the private sector as a percentage of GDP at 79.9%, followed by Honduras at 73.91% and Brazil at 71.65%. While this data does not directly reflect private credit activity, it serves as a useful indicator of private sector engagement with banking institutions.

Although local banks have traditionally provided liquidity, investment funds are playing an increasingly important role in financial markets in Latin America and the Caribbean, according to Inter-American Development Bank Group.

“If more private credit actors enter the market, it could address some of the liquidity challenges faced by mid-sized companies in Latin America,” Dias Vieira said. “In Brazil, for example, while large companies continue to access the international bond market, mid-sized companies that may find it difficult to access financing through traditional bond markets are increasingly turning to alternative sources of financing.”

Since banks in Latin America are generally more conservative in their financing arrangements, the financing options for mid-size companies are often limited, according to Dias Vieira and Aguiar. Meanwhile, bond markets can be more volatile and are typically only accessible for large-ticket issuances, making private credit an attractive option for SMEs with financing needs between $50 million to $150 million, Dias Vieira explained.

International funds that have shown interest in the region or have started getting involved in private credit deals include Accial Capital, Variant Investments, SixPoint Capital, Fasanara Capital, BancTrust, Gramercy, Macquarie, according to Cascade and Global Banking & Markets. Several local funds in Brazil have also gained traction by focusing on special situations and the private credit market. Prominent players include BTG Pactual, Jive Investments, Quadra Capital, Lumina Capital, Journey Capital, Vinci Partners, Prisma Capital and Root Capital. Additionally, some equity managers, such as Verde Asset Management, have started shifting their focus toward credit markets.

However, the private credit market is not without its challenges. Although it has been driven in the United States by attractive return rates, with direct lending funds averaging around 11% and mezzanine debt funds as high as 20%, there has been a rise in defaults, which reached 5.7% in February 2025, according to Fitch Ratings.

In the United States, lenders used to seek stronger protections, such as collateral, guarantees from shareholders and tighter covenants. However, as the market expands, some lenders are relaxing these protections to cope with an oversupply of capital, Dias Vieira explained.

“In cases where the borrower defaults, enforcement becomes particularly challenging if the loan is under-collateralized, which is often the case in sectors with few tangible assets, such as software or financial services,” Dias Vieira said. “Riskier loans can lead to more complex collection procedures, frequently spanning multiple jurisdictions, including offshore, and not uncommonly involving allegations of misconduct or even fraud, some of which could be avoided with proper diligence.”

In contrast, for private lenders in Latin America, there are opportunities to structure loans with strong collateral packages, such as dollar-denominated loans and tangible assets, to reduce the impact of currency risk and enhance the security of the investment, according to Dias Vieira.

In terms of attractive sectors for private credit investors in Latin America, renewable energy stands out as a promising area, according to Dias Vieira and Aguiar. There is growing attention on investments in solar and hydroelectric power as well as other infrastructure projects associated with the energy transition.

Notably, Blackstone allocated $7 billion for renewable energy and infrastructure projects in 2023, underscoring the potential for these sectors in Latin America. Patria also launched its Infrastructure Private Credit fund in 2024, which has already raised 1 billion Brazilian reais (about $ 200 million).

“Capital needs in solar energy and related areas are driving companies to seek funds, and investors who are comfortable with exposure to the dollar may find this market especially attractive,” Dias Vieira said.

Private Credit Expansion in Brazil

As dollar-denominated bond issuances in Brazil have declined, companies have been shifting toward the debenture market, according to financial and capital markets association Anbima and global investment manager Ninety One. The legal framework for insolvency in Brazil is one of the reasons foreign investors have kept from reentering the high-yield and distressed debt market, Aguiar explained.

“Unlike in the United States, insolvency proceedings in Brazil are typically debtor-driven rather than creditor-driven, which can create uncertainty for investors seeking to enforce their rights,” Aguiar said. “Although changes to the insolvency law in 2021 have allowed creditors to propose alternative restructuring plans, these provisions are still being tested, and shareholders continue to exercise substantial control over the process.”

One of the key distinctions between Brazil and the United States is the absence of an absolute priority rule, Aguiar explained.

“Creditors may be required to forgo recoveries in favor of shareholders who retain significant equity, making debt recovery more challenging,” he said.” ”This underscores the need for creditors to think creatively and develop alternative strategies, including outside Brazil.”

In contrast to bondholders, who are constrained by the terms of indentures that cannot be altered, private credit investors may have more options to mitigate legal risk. Although the uncertainties surrounding insolvency proceedings remain, private credit structures can be designed to account for these risks in advance, according to Dias Vieira and Aguiar.

By incorporating arbitration clauses in private lending contracts, creditors can keep their options open, according to Dias Vieira.

“Such awards can be more easily enforced in other jurisdictions under the New York Convention, offering greater flexibility to creditors, particularly if the debtor has assets outside of the country,” said Dias Vieira.

At a Global Banking & Markets event in December 2024, a survey asked attendees to identify the most important competitive advantage of private debt funds. Sixty percent of respondents cited flexibility in financing terms, followed by risk-adjusted returns as the next most important factor, according to a summary report post-event.

For mid-size companies in Brazil that face limited financing options, the availability of multiple financing channels - whether through local banks, bond markets or international private credit - is a welcome development, according to Dias Vieira and Aguiar. Recent updates in Brazil’s regulatory environment, such as tax incentives for credit funds and expanded access for retail investors, suggests that the private credit market in Brazil will continue to grow, according to Dias Vieira.